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This article provides a comprehensive look at Medicaid, its impact on long term care planning and the treatment of life insurance as an unqualified asset when determining Medicaid eligibility.

Over 10 million Americans now require long term care annually. Medicaid is the primary payer of long term care services in the United States. The national average cost of a nursing home is $72,000 per year, for assisted living it is $38,000, and for home health care services it is $21 per hour. Most people will drain all personal savings and assets paying for long term care in their first year of usage.

In 2009, Medicaid spent $240 billion on long term care services, accounting for 43 percent of total expenditures. By comparison, $45.6 billion, or 19 percent of long term care services, was paid “out of pocket” by the consumer. States spent on average 16 percent of their annual budgets on Medicaid, making it the second biggest budget item behind only education.

Medicaid and state budgets have been impacted particularly hard by shrinking tax dollars and growing Medicaid enrollment brought on by the economic crisis and an aging population. There is a combined budget shortfall of $121 billion across 46 states for fiscal year 2011. States are legally required to operate with balanced budgets every year, and draconian cuts as well as federal assistance have become necessary.

The federal government passed a temporary increase in federal matching payments (FMAP) for Medicaid of $87 billion in 2009. Over 2010 and 2011, the FMAP was extended at reduced levels by half and then by half again, and will be eliminated in 2012. As the FMAP assistance winds down and ultimately concludes, state spending will need to increase by at least 25 percent to keep pace — and at a time when the dollars are not available.

States have begun looking for alternative ways to stimulate private dollars to help pay for the costs of long term care and reduce the pressure on Medicaid budgets. One example has been the unanimous passage by the National Conference of Insurance Legislators (NCOIL) of the Life Insurance Consumer Disclosure Model Law, requiring that life insurance companies inform policy owners they have a number of options to consider instead of abandoning an in-force policy. Among the options in the law is the right to convert a life insurance policy into a long term care benefit plan.

An assurance benefit will convert any form of life insurance to pay directly for the costs of long term care in a nursing home, assisted living and home healthcare. It is considered a “qualified spend down” of a life insurance policy asset for Medicaid eligibility. This option also allows the owner to preserve a portion of the death benefit throughout the spend down period, protecting it from Medicaid Estate Recovery legal action.

Sources:

Kaiser Family Foundation, Medicaid Fact Sheet, March 2011 and State Fiscal Condition and Medicaid Report, October 2010

Q: Does ownership of a life insurance policy count against an applicant for Medicaid eligibility?

A: A life insurance policy is legally recognized as an asset of the policy owner and it counts against them when qualifying for Medicaid. If a policy has anything more than a minimal amount of cash value (usually in the range of $2,000) it must be liquidated and that money spent towards cost of care before the owner will qualify for Medicaid. All Medicaid applications specifically ask if the applicant owns life insurance and full policy details. Failure to disclose and comply is fraud.

Some states allow for a final expense policy to be kept or transferred to a funeral home (but the funeral home would keep the entire death benefit). Medicaid recovery units have become much more forceful about looking for life insurance policy death benefits (declared and undeclared) that have paid out to families after the death of a Medicaid recipient. Medicaid budgets are now facing extreme pressure and asset recovery efforts can be very aggressive. Recovering the entire cost of care through legal actions against the estate and surviving family to go after the death benefit payment are common.

Q: What options do owners of a life insurance policy have when attempting to qualify for Medicaid?

A: Medicaid rules are very clear that a life insurance policy is an unqualified asset and counts against Medicaid eligibility. The owner of one or more policies has a variety of options to consider:

A policy with more than a minimal amount of cash value (usually $1,500 or more depending on the state) must be liquidated with the proceeds spent down on care.

A policy with no cash value does not need to be liquidated, but the death benefit will be subject to Medicaid recovery efforts to return the amount of money spent on care.

Many states will exempt a “final expense” policy if the full death benefit value is assigned to a funeral home.

Assignment of a life insurance policy for less than its fair market value is a violation of asset transfer rules if done within the 60-month look back period.

A policy owner has the legal right to convert a life insurance policy into a long term care benefit plan at its fair market value and extend their spend down period by covering cost of care while preserving a portion of the death benefit until exhausted.

Q: How does a policy conversion work?

A: By converting an existing life insurance policy to a long term care assurance benefit plan, the owner is spending down the asset towards their cost of care in a Medicaid compliant manner while still preserving a portion of the death benefit. If the insured passes away while spending down via their assurance benefit enrollment, any remaining death benefit would pay out to the designated beneficiary without being subject to Medicaid recovery.

Enrollees able to now use non-Medicaid dollars are allowing themselves to access the best level of care and options by remaining a “private pay” patient for as long as possible (private pay rates are at higher levels of 30 percent or more than Medicaid and are preferred by long term care providers). Medicaid reimbursements are less than the actual cost of care and are restrictive in what is allowed for coverage. Assisted living is not covered at all and home health coverage is limited and subject to change. The primary source of care for a Medicaid patient is a nursing home.

Conversion of a life insurance policy to an assurance benefit allows for maximum choice of care options, and preservation of a partial death benefit instead of 100 percent abandonment.

United States Government Accountability Office (GAO) report to the United States Congress, “Medicaid Long Term Care” report, March, 2007

Medicaid eligibility fact sheet

What is Medicaid? Medicaid is health insurance that helps many people who can't afford medical care pay for some or all of their medical bills. Medicaid is available only to people with limited income. You must meet certain requirements in order to be eligible for Medicaid.

Who qualifies for Medicaid? Many groups of people are covered by Medicaid. Even within these groups, though, certain requirements must be met. These may include your age, whether you are pregnant, disabled, blind, or aged; your income and resources (like bank accounts, real property, life insurance, or other items that can be sold for cash); and whether you are a U.S. citizen or a lawfully admitted immigrant. The rules for counting your income and resources vary from state to state and from group to group. There are special rules for those who live in nursing homes and for disabled children living at home.

Who qualifies for long term care to be covered by Medicaid? In addition to financial eligibility, states determine if an individual meets the functional criteria by assessing the limitations in an individual’s ability to carry out activities of daily living (ADL) and instrumental activities of daily living (IADL). The Medicaid statute requires states to use specific income and resource standards in determining eligibility; these standards differ based on whether an individual is married or single. If a state determines that an individual has transferred assets for less than fair market value, the individual may be ineligible for Medicaid coverage for long term care for a period of time.
Individuals who incur high medical costs may spend down into Medicaid eligibility because these expenses are deducted from their income. Spending down may bring their income below the state determined income eligibility limit.

What type of assets count against Medicaid eligibility? Income and assets are both calculated to determine Medicaid eligibility. Income from work, investments and entitlements such as Social Security all need to be reported by the applicant. Assets such as cash, stocks, bonds, trusts, annuities, real estate, vehicles and life insurance all must be reported and are calculated for eligibility. States determine their own specific eligibility standards within federally mandated parameters.

How is life insurance counted as an unqualified asset? Ownership of any in-force life insurance policies must be reported by the applicant when determining eligibility for Medicaid, and failure to report is fraudulent. Specific limitations vary by state, but any policy with cash value in the range of $1,500 to $2,500 must be liquidated and the proceeds spent down on care before eligibility is approved. Exemptions are allowed for final expense policies if the entire policy is assigned to a funeral home. Term policies that do not have cash value are also exempt, but the death benefit and estate is subject to legal action and liens by the Medicaid department to recover all money spent on care for the deceased.

Life insurance is an unqualified asset and counts against the Medicaid applicant’s eligibility to qualify. Any amount of money derived from ownership of a life insurance policy must be either spent down on care (cash value or monetary value available while alive) or the death benefit is subject to legal action against the estate as part of Medicaid’s required asset recovery procedures.

What are the rules for Medicaid Recovery actions? The Omnibus Budget Reconciliation Act (OBRA) of 1993 defines estate and requires each state to seek adjustment or recovery of amounts correctly paid by the state for certain people with Medicaid. The state must, at a minimum, seek recovery for services provided to a person of any age in a nursing facility, intermediate care facility for the mentally retarded, or other medical institution.

The state may at its option recover amounts up to the total amount spent on the individual's behalf for medical assistance for other services under the state's plan. For individuals age 55 or older, states are required to seek recovery of payments from the individual's estate for nursing facility services, home and community-based services, and related hospital and prescription drug services. States have the option of recovering payments for all other Medicaid services provided to these individuals.
People with Medicare are notified of the Medicaid estate recovery program during their initial application for Medicaid eligibility and annual redetermination process. Individuals in medical facilities (who do not return home) are sent a notice of action by their county Department of Social Services informing them of any intent to place a lien/claim on their real property. The notice also informs them of their appeal rights. Estate recovery procedures are initiated after the beneficiary's death.

Can ownership of a life insurance policy be transferred to keep the policy in the family? When an individual applies for Medicaid, the state conducts a "look back" to find transfers of assets for 60 months prior to the date the individual is institutionalized or, if later, the date he or she applies for Medicaid. All transfers made by the applicant or the applicant’s spouse subsequent to January 1, 2010, whether from an individual or to an individual or from a trust or to a trust, have a five-year look-back period.

These provisions apply when assets are transferred by individuals in long term care facilities or receiving home and community-based waiver services, or by their spouses, or someone else acting on their behalf. At state option, these provisions can also apply to various other eligibility groups.

Transferring ownership of a life insurance policy for less than its fair market value would be a violation of Medicaid’s asset transfer and look back requirements. A policy can be surrendered for its cash value to be spent down on car, or a policy can be converted for its market value and the benefit of that conversion can be used to pay for long term care as a qualified spend down.

Are there penalties or delays to qualify for Medicaid based on violations of asset transfers and reporting? If a transfer of assets for less than fair market value is found, the state must withhold payment for nursing facility care (and certain other long term care services) for a period of time referred to as the penalty period.

The length of the penalty period is determined by dividing the value of the transferred asset by the average monthly private-pay rate for nursing facility care in the state. Example: A transferred asset worth $90,000, divided by a $3,000 average monthly private-pay rate, results in a 30-month penalty period. There is no limit to the length of the penalty period.

(Section 1917(c) of the Social Security Act; U.S. Code Reference 42 U.S.C. 1396p(c))

About the Author

Chris Orestis is CEO and founder of Life Care Funding; a nationally known senior care advocate and 18-year veteran of both the life insurance and long-term care industries, is an author and a frequent speaker, featured columnist and Contributing Editor to a number of industry publications, includ... More